One of the great dangers of adopting a rigid exchange rate policy is that it invites speculative attack on the shekel, said Omer Moav, an economic adviser to the prime minister. Speculative attacks occur when international speculators spot a fixed exchange rate supported by the government at a level that isn't economically feasible. That was the background to George Soros' famous attack on the pound sterling in 1992, Moav noted.
On the other hand, when an exchange rate is mobile, there is no reason for speculative attacks, since there is no government there dishing out currency to support an artificial exchange rate.
For a year, until August, the Bank of Israel bought a fixed $100 million a day. But it changed its policy last month, and will now intervene in the forex market only when it sees a market failure.
Moav said this greatly increased the danger of speculative attack, and may thus have been misguided. Indeed, the central bank itself has admitted that speculators have been active on the local scene.
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